Human Stock Traders Have AI Beat

New research shows it pays to use floor traders—even in the age of algorithms.

New York Stock exchange listing.

Artificial intelligence seems to be edging into nearly every sector of human activity. But a new study from the University at Buffalo found one place where people still outperform algorithms: the stock floor.

What COVID-19 revealed

Of the 13 registered exchanges in the U.S., only the New York Stock Exchange continues to use human floor traders—the rest are 100% electronic. But in 2020, the NYSE suspended floor trading due to the COVID pandemic, providing an opportunity to compare the two approaches.

“Given the increasing popularity of algorithms, and the growing belief that artificial intelligence will disrupt labor markets, many have argued that floor traders are no longer necessary,” said Dominik Roesch, associate professor of finance in the UB School of Management and co-author of the study. “But the closure of the NYSE trading floor due to COVID led to worse market quality across a variety of measures, including liquidity, price efficiency and auction quality.”

stock traders.

Photo Credit: NYSE Group

Matchup on the stock floor

To understand the impact of floor traders on NYSE market quality, the researchers combined data from the Center for Research in Security Prices with the NYSE Trades and Quotes database. Using this data, they examined the relation between floor trading and various measures of market quality, comparing the quality of NYSE stocks both before and after the suspension of floor trading, and comparing NYSE stocks to their equals on the NASDAQ exchange.

illustration of man versus robot.

Better outcomes with brokers

Their results show that pricing errors for NYSE stocks increased by 2-6% after floor trading was removed, illustrating how humans continue to be valuable even in the age of algorithmic trading.

According to Roesch, there are two reasons floor traders are important. “First, the floor facilitates the transfer of information in a way that electronic trading cannot,” he said. “Second, clients can give brokers some latitude to work on their behalf when buying and selling, which improves outcomes.”